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The Next Steps to Watch for in the Unfolding Dell Buyout Drama

Published on July 18, 2013by Arik Hesseldahl

After setting what must be some kind of record for the shortest corporate meeting ever (Don’t believe me? See the AllThingsD liveblog of the proceedings here), the vote on the $24.4 billion buyout proposal of the company has been delayed for six days. That means a lot more than a simple continuation of the unfolding corporate drama.

For one thing, it indicates that the special committee of Dell’s board thinks the current proposal would have been rejected had the vote been held today. Indeed, numerous shareholders have come out against it, the latest being State Street and Vanguard, bringing the percentage of shareholders known to be opposed to above 28 percent.

What will happen next is a flurry of activity. Shareholders will be lobbied to change their minds or stand their ground, depending on how they’re currently leaning and who’s asking.

Meanwhile, shareholders will hint that they might switch camps if perhaps a few more cents per share were on the table. Dell and Silver Lake on Tuesday sent a determined signal that they were willing to let the proposal “blow up,” and were unwilling to raise their bid above $13.65 per share. And indeed there are shareholders on the fence who would likely side with Carl Icahn if he raised the share price of his recapitalization proposal above its current $14 level.

The delay cannot and will not go on forever, which means the vote on the buyout proposal either must eventually proceed — the next attempt will be on the afternoon of July 24 — or be withdrawn. If CEO Michael Dell can’t marshal sufficient shareholder support to approve it, it will be defeated, which brings us to the next step: A proxy fight for control of the company.

That next step will occur at the annual meeting of shareholders, which is distinct from the “special” meeting of shareholders briefly called to order and then hastily adjourned today. That meeting should take place no later than mid-August, and when it does, Icahn and his allies, chiefly Southeastern Asset Management, will aim to persuade other shareholders to elect their proposed slate of directors.

That vote will be different from the vote on the buyout proposal in one significant way: The company’s largest shareholder — CEO Michael Dell — will be allowed to vote his 13.86 percent of shares in support of the current board. Rules set by the board’s special committee overseeing the buyout process have required him to abstain. Once those rules are no longer in force, his proxy voting power will loom large. Icahn and Southeastern combined control shares amounting to 12.86 percent, according to data from Thomson Reuters.

It will be difficult for either camp to solidify complete control of the board. It’s not clear how some shareholders will vote. Some may simply oppose the buyout proposal, while others may be willing to give Icahn a shot at remaking the company. Memories of his efforts at Motorola — where he prodded, scolded and cajoled management to break itself up, culminating in the sale of its handset division to Google in 2011 — are still fresh. Recall that Icahn himself made out like a bandit on the deal, as did those Motorola shareholders who followed his lead.

In the event that Icahn wins control of the board, he’ll next move to get shareholders to approve his recapitalization plan. For this to happen — and for the financing he needs to be available — he has to win control of the whole board. That’s unlikely, but for the sake of argument, let’s say he does. He’ll buy up to 72 percent of shares at $14, plus a seven-year warrant to buy more shares at a strike price of $20. The offer also includes a special one-time dividend that would be paid for by existing cash on Dell’s balance sheet plus a lot of new debt.

But as has been noted before, here’s where it gets interesting: Assuming that Michael Dell holds on to his shares, under that recapitalization plan, his share of the company would grow to north of 40 percent, giving him the proxy power to potentially derail Icahn’s moves down the road.

So, if the corporate drama so far hasn’t been enough for you, consider this: There just might be a sequel.

Update: So, late last night, between 11 pm and midnight ET, several large shareholders — specifically BlackRock, Vanguard Group and State Street, have reversed their votes, and are now prepared to vote in favor of the Michael Dell/Silver Lake buyout proposal. Their combined holdings amount to about 10 percent of the shares outstanding, or about a quarter of the shares needed to secure approval. Representatives of those firms are said to have reconsidered their position once it was clear that there would not be a higher bid from Dell and Silver Lake.

Their flip-flop — and, indeed, they can change their minds again right up until the last minute — would reduce the number of shareholders known to oppose the buyout to slightly above 18 percent.

There’s also the issue of the number of votes counted so far. The Wall Street Journal reported that about 77 percent of the eligible votes cast have been leaving a big bloc of non-votes. These are equal to no-votes. One big reason for the delay is simply to give the special committee time to get more votes out.